As an estate planning attorney with nearly 30 years of experience, I've helped countless homeowners in Minnesota and Florida navigate the complex world of trusts. One question I often hear is, "What are the disadvantages of putting my home in a trust?" It's a great question, and in this article, we're going to dive deep into this topic.
Understanding Trusts: The Basics
Before we get into the disadvantages, let's quickly review what a trust is and why people consider putting their homes in one.
What Is a Trust?
A trust is a legal arrangement where you (the grantor) transfer ownership of your assets, like your home, to a trustee (usually you while you are alive). The trustee manages these assets for the benefit of your chosen beneficiaries; which are usually you while you are alive and then for your kids, charities or whoever else you have selected to receive your assets upon your passing. It's like creating a treasure chest to hold your property.
Why Do People Put Their Homes in Trusts?
There are several reasons why homeowners, consider putting their homes in trusts:
1. Avoiding probate
2. Maintaining privacy
3. Protecting assets
4. Managing property in case of incapacity
5. Reducing estate taxes
6. Ensuring smooth transfer of property to heirs
Now that we've covered the basics, let's explore the potential disadvantages of putting your home in a trust.
The Disadvantages of Putting Your Home in a Trust
While trusts offer many benefits, it's important to understand the potential drawbacks. Here are the main disadvantages to consider:
1. Initial Cost
Setting up a trust isn't free. You'll need to pay for legal services to create the trust document and transfer your home into it. This process can be more expensive than simply writing a will.
For example, creating a basic will might cost several hundred dollars, while setting up a trust could cost a few thousand. However, it's important to remember that this is often a one-time cost that can save your family much more in the long run because they will not have to deal with a probate proceeding.
2. Additional Paperwork When Refinancing
Some lenders might be hesitant about mortgages for homes in trusts; often requiring some additional paperwork to be prepared, usually by an attorney, and then sent to the mortgage company detailing key aspects of the trust. While this is usually only a few hundred dollars, it is something to be aware of.
That said, many lenders are familiar with trusts and will work with you. It might just take a bit more time and explanation.
3. Additional Paperwork When Selling
Depending on the closing or title company you use, and their level of experience with trusts, it may require some additional paperwork from an attorney when you sell.
When you sell a home owned by a trust, it requires three specific forms: 1) A Trustee’s Deed transferring the property from the trust to the new owners; 2) An Affidavit of Trustee stating that the person or people signing the deed are the current trustee(s) of the trust; and 3) A Certificate of Trust with information about the trust that will be required by the County Recorder’s Office. Many title companies familiar with trusts will prepare these as part of your closing. Others may ask an attorney to prepare the documents for them. Either way, it should be seamless for you when selling your home.
Why the Advantages Often Outweigh the Disadvantages
Despite these potential drawbacks, in my experience, the advantages of putting your home in a trust often outweigh the disadvantages for many homeowners. Here's why:
1. Probate Avoidance: A Major Benefit
One of the biggest advantages of putting your home in a trust is avoiding probate. Probate is the legal process of administering a person's estate after they die. It can be time-consuming, expensive, and public.
For example, in Minnesota, the probate process can take anywhere from 6 months to over a year. In Florida, it typically takes 6 to 12 months. During this time, your heirs can't freely access or sell the property.
By putting your home in a trust, you ensure that it passes directly to your beneficiaries without going through probate. This can save your loved ones significant time, money, and stress during an already difficult period.
This is especially important for those families who may have homes and assets in more than one state. For example, many of our clients own a home in Florida and a home “back up north”. If they were to pass away with just a will in place, their family would need to open probate in each state where they have property. That is because the probate courts only have jurisdiction over the property in their state. By putting everything in a trust, they avoid the time and expense of multiple probate in more than one state.
2. Privacy Protection
Unlike a will, which becomes a public document when it goes through probate, a trust remains private. This means the details of your estate, including who inherits your home, stay out of the public eye.
For many of my clients, this privacy is invaluable. It helps protect their families from unwanted attention and potential predators who might try to take advantage of a sudden inheritance.
3. Control Over Asset Distribution
A trust gives you more control over how and when your assets are distributed. You can set specific conditions for the inheritance of your home.
For instance, I had a client who wanted to ensure her lakefront property in Minnesota stayed in the family for generations. We set up a trust that allowed her children to use the property but prevented them from selling it outside the family. This level of control isn't possible with a simple will.
4. Protection from Creditors
Depending on how it's structured, a trust can provide significant protection for your home and assets against creditors; both yours and your kids. This can be especially important if you're leaving your home to beneficiaries who might have financial troubles or who get divorced. The last thing you want is for your home and life savings to be lost to your child’s soon-to-be ex-spouse.
I've seen this benefit many of my clients in both Minnesota and Florida. It gives them peace of mind knowing that the home and their savings they've worked hard for will be protected for their loved ones.
5. Incapacity Planning
A trust can be an excellent tool for managing your affairs if you become incapacitated. If you're unable to manage your own finances due to illness or injury, your chosen trustee can step in to manage the trust assets, including your home, without the need for court intervention.
This can be a huge relief for many families, as it avoids the need for a court-appointed guardian or conservator, which can be a costly and stressful process.
6. Tax Planning
Certain types of trusts can help you to minimize or even avoid estate taxes. At the time of this article, the Minnesota estate tax rate is 13%-16% and the federal estate tax rate is 40%. If your estate is over either or both the Minnesota or federal estate tax exemption limit, trusts can save your family a significant amount in taxes.
7. Long Term Care and Nursing Home Protection
According to the federal department of Health and Human Services, over 70% of people over age 65 will need some form of long-term care. And with nursing home costs averaging over $100,000 nationwide, long-term care costs can quickly deplete your savings.
Specific types of trusts, such as Medicaid Asset Protection Trusts, can protect your home and life savings from long-term care costs.
Making the Right Choice for Your Situation
While the advantages of putting your home in a trust are significant, it's important to remember that every situation is unique. What works best for your neighbor or friend might not be the ideal solution for you.
Factors to Consider
When deciding whether to put your home in a trust, consider:
1. Your overall estate planning goals
2. The value of your home and other assets
3. Your family situation
4. Your health and age
5. Your desire for privacy and control
The Importance of Professional Advice
Given the complexity of estate planning and the significant impact it can have on your family's future, it's crucial to get professional advice. An experienced estate planning attorney can help you weigh the pros and cons based on your specific situation.
As someone who's been practicing in this field for nearly 30 years, I've seen firsthand how proper planning can make a world of difference for families in Minnesota and Florida. It's not just about avoiding probate or saving on taxes – it's about ensuring peace of mind for you and your loved ones.
Conclusion: Is Putting Your Home in a Trust Right for You?
So, what's the bottom line? While there are some potential disadvantages to putting your home in a trust, the advantages often outweigh the drawbacks.
The initial cost of setting up a trust can save your family much more in the long run. The ongoing management, while requiring some effort, provides you with control and flexibility. And while there might be some challenges with refinancing, these are often manageable with proper planning and communication.
Most importantly, a trust can provide invaluable benefits like probate avoidance, privacy protection, asset control, tax savings, incapacity planning, creditor protection and protection in the event you require long-term care. These advantages can make a real difference in protecting your home and ensuring it passes to your loved ones exactly as you intend.
If you're a homeowner and you're wondering if a trust might be right for you, give us a call today at either our Florida office at (941) 909-4644 or our Minnetonka, MN office at (763) 420-5087 to schedule a consultation. Or you can fill out the contact form on this page and a member of our team will reach out to you to schedule.
Or, if you are not yet ready to schedule a consultation and would like additional information, we have some resources available to you:
Click here to sign up for my masterclass where I reveal strategies to make it as easy and inexpensive for your family to manage your affairs in the event something happens to you. I’ll cover how to avoid probate, wills vs. trusts, how to minimize or even avoid estate taxes, how to protect the money you leave for your kids in the event they get divorced and much more.
Click here to download your copy of my guide, “Save Our Home How To Protect Your Home and Life Savings from Long Term Care and Nursing Home Costs”
Click here to sign up for my masterclass where I reveal strategies I use with my private clients to protect their home and life savings from long-term care and nursing home costs.
Remember, it's never too early to start planning for the future. The peace of mind that comes from knowing your affairs are in order is truly priceless. So why wait? Take the first step towards securing your legacy today.
